Measuring Inequality

Economists often look at the distribution of income as an indicator of economic well-being (today, in fact, in another NY Times article). The theory goes that if we see how much a person makes, then we will have some idea of how well-off they are assuming higher incomes mean better-off. In today’s economy though, many of us have accumulated a lot of debt; so if your income can’t keep pace with what you owe, income is no longer an accurate barometer of your financial well-being.

One alternative is to look at wealth. Wealth is the value of what we own minus what we owe. It’s the value of your home, car, jewelry, TV, savings, retirement accounts, stock investments, and baseball card collection minus your credit cards, mortgage, car loans, etc.

The distinction between wealth and income is significant. Wealth represents financial stability and security, the capacity to be economically resilient when times are tough. Income is just about what’s coming in, without regard to how much goes out. If you have some wealth, you can better withstand unemployment, manage a health crisis, send a kid to college or start a new business. Wealth makes the risks of life less risky and the great opportunities in life more possible. Some people aim for high income as a goal, but what most of us really want is wealth.

How is Wealth Distributed?

So here is what the distribution of wealth looks like in the United States as of 2007.

Each chair represents 10% of the wealth, and each person represents 10% of the households. So if a person is sitting down, that 10% of the households hold 10% of the wealth.

This picture shows that actually the top 20% of households hold more than 80% of the wealth (the real number is 85), while the bottom 80% of households hold less than 20% of the wealth (in reality many of them have negative wealth because they are in debt).

Differences in types of wealth

The concentration at the top is actually more extreme than in appears. The top 1%, say one person’s hand, holds 35% of the nation’s wealth alone. The income of the top 20% comes primarily from their wealth – the stocks, bonds, trusts, real estate, business investments, etc. that provide them with capital gains income (capital gains is a type of income derived from investments, as opposed to income from labor). It is liquid — meaning its form can be easily shifted or changed back into cash (again, handy in a pinch).

For the bottom 80% trying to share two chairs, those chairs represent homes, savings accounts, retirement savings and pensions. The income of the bottom 80% is not really coming from these investments though; it is mostly coming from work. That is why you can have someone making $100,000 a year in this category. They may make a lot, but it might be paying off the debt in her house, medical bills or college tuition. Also, the wealth is less liquid. Yes, one might have savings in an IRA, but there are limits to how much you can access and penalties for doing so. In other words, the bottom 80% has more trouble accessing the little wealth they do have.

Scarcity, Excess or Sufficiency?

So where is the scarcity and excess in this picture? Where is the sufficiency? Do we have enough for everyone to sit down or not? This picture reminds me of those black-and-white drawings where if you look at the black space you see two people facing each other, but if you look at the white space you see a vase. What do you see?

Sometimes I see eight people focused on two chairs and fighting like crazy to be the one that sits down whether it is a debate about taxes, stimulus packages, education spending or reforms to entitlement programs. And I see the eight chairs with two people who can’t figure out what to do with them, and are probably a bit worried about what will happen if the other eight people actually see just how many chairs they have (if they even know). When I put myself in the shoes of the people in this picture, mostly I see us vs. them. And the resulting relationships and conversations between them are not pretty.

Occasionally, I see the whole picture at once — that there is more than enough chairs for everyone to sit down and change the picture entirely. But it takes conscious effort on my part to look at this picture and remember that there is no them, only us.

If we want an economy that is based in sufficiency rather than scarcity, the first step is to choose to see differently. We can focus narrowly and talk about how eight people should share two chairs or how those with eight chairs should share, the us-vs.-them mode. But to come from sufficiency, we can choose to see ourselves in all those people and with all those chairs — people with the opportunity to come together as one and make different choices.

NOTES to readers:

The data on wealth is hard to come by. Professor Edward Wolff has faithfully written about wealth statistics over the years and his latest research which includes the data used in this article can be found here and “pre-crunched” by Professor G. William Domhoff here.

Over the next couple of weeks I will have a series of posts about the Ten Chairs, what we learn about the economy simply by looking at the distribution of wealth. It provides critical context for understanding how we created the economy we have and how to create a different one. Like many good ideas, there are many versions of this illustration being used by various activists, and mine draws largely from the workshop designed by Just Economics and University of Massachusetts, Boston Professor Marlene Kim. United for a Fair Economy also has excellent versions of it on its website and live trainers available to give it as a workshop, too.

I like the people and the chairs. Another fun visualization is a parade, where people march by, and their height is relative to their wealth, from Jan Ven (there’s a link to it here in a blog post I wrote for Stanford Social Innovation Review: http://www.ssireview.org/opinion/entry/anti_poverty_engineers/). It isn’t until near the end of the day that people start to seem normal height, and at the very end, the super wealthy are so big you can only see the tops of their shoes.

I love the way you explain this, Kim. I see people who live much more lavishly that me – housekeepers, gym memberships, vacations, new cars – but they are relying on their income and are not necessarily wealthy. It reminds me of a news story about an elderly women who works as a school janitor for 30 years, lives modestly and leaves a million dollars to her favorite charity when she dies.

Great post. I agree with your conclusion, that “…we can choose to see each ourselves in all those people…..and come together as one and make different choices”. While I find this mindset to be very reasonable, I fear that it can be misconstrued as communism. The skill set necessary to “think outside the box”, to empathize and listen; these things seem to be scarce in today’s society. I wish that were not the case but unfortunately for all of us, it seems to be so.